Nearly twice as many trailer manufacturers report that they are thriving, compared to 2011 survey

Optimism is increasing along with trailer sales.

According to a survey of the trailer industry by RSM McGladrey Inc, 65% of trailer companies are somewhat optimistic about the growth prospects for this year. Only 19% are somewhat pessimistic, compared to 31% in the general economy.

Sam Reschly, McGladrey's assurance services director, presented the survey results, saying that 38% said their business was thriving, compared to just 23% in 2011. Less than 2% said their business was declining — down from 10% in 2010. A full 100% expect a sales increase, compared to 82% in 2011.

What's going to drive that growth?

  • 50% of respondents expect increases in international sales.

  • 67% of respondents are greatly or somewhat relying on increased product offerings.

  • 100% of respondents are greatly or somewhat relying on increased sales to current customers.

  • 93% of respondents are greatly or somewhat relying on acquisition of new customers.

“Everyone is expecting to get new customers,” Reschly said. “I will point out that if I'm getting a new customer, I'm taking it away from someone else. While you're trying to acquire new customers, also be cognizant about your existing customers. We're seeing some of the loyalty going away.”

Reschly said there is no significant push towards green in the trailer industry.

“It's a fringe play for most,” he said. “Manufacturing processes can be impacted. There are no significant marketing impacts. The impact on the economy continues to be a mystery. Companies receiving prior governmental aid are struggling to stay open.”

He said the survey shows that inventory levels increased in 2011, quantities are rising, and there is more build-to-stock versus build-to-order. Seventy-seven percent of respondents are using foreign sources to supply inventory (versus 50% in 2011). Lead times continue to be challenging, and there are prepayment and LOC matters. He said 80% of respondents source at least 15% of their raw materials from foreign sources. Forty-six percent said they strongly agree that they are relying on foreign sourcing, compared to 62% in 2010.

Fifty-three percent of respondents experienced inventory shortages in 2011.

“As we talked to manufacturers, the biggest cause seemed to be that suppliers are struggling,” he said. “They were going through the recession just like you were. They were eliminating costs and overhead, and eliminating head counts so they could survive. Now they're cautious to add those things back in.

A good sign: 41% of manufacturers said they were going to increase their work force in 2012 — up 32% from last year.

Health benefits remain a large component of a company's cost structure, with a majority of respondents fully insured: 53% cover 41% to 60% of employee premiums; and 20% cover 61% to 80% of employee premiums. Future costs: 46% see less than a 10% change in 2012; 26% see a 10% to 19% increase in 2012; 27% see a 20% or more increase in 2012.

Thirty-one percent say they are considering shifting carriers, compared to just 19% in 2011, while 39% were planning to pass on the increased costs to their employees, compared to 59% in 2011.

In terms of 2011 revenue, 27% of respondents have 31% to 40% of their revenue in the top five customers; 27% of respondents have 41% or more of revenue in their top five customers.

“That's troubling, given dealer-loyalty trends,” he said. “Their loyalty is fading a little.”

In terms of price increases on the sales side, 80% raised prices in 2011; 40% raised prices by 1% to 5%; 27% raised prices by 6% to 10%; and 13% raised prices by more than 10%.

Growth slows

McGladrey director Tim Koch said that most trailer companies grew 5% to 15% in 2011 — a decline from 28% in 2010. Per-unit revenue increased year-over-year. While it was less than the 2006-2007 performance, it is getting “closer.”

Bottom lines improved 291% in 2010, which he said had “more to do with how bad 2009 was versus how good 2010 was.” For assemble-to-order manufacturers, it was 182%.

No percentages were available for 2011, but he said increases have been common.

“We're seeing people have very good bottom lines,” he said. “What's interesting is I expected the trend from 2010 to continue forward — the do-more-with-less attitude. Everybody's watching their dollars in terms of spending on inventory and overhead. We saw that in first months of 2011, but then we saw people increasing inventory levels.

They increased employee levels, which isn't a bad thing as long as it's done responsibly. They increased borrowings and lines of credit. People are talking about expansions. How will this impact performance? It could be people ramping up and we'll have a great 2012.”

He said lending sources are increasing availability, and they're seeing things like owner guarantees going away or being reduced.

Pricing pressures

Trailer dealers continue to face pricing pressures from their customers, Koch said.

“The end customer is the one driving the process,” he said. “Where is dealer loyalty?”

“Fringe dealers are the ones that are looking for the best price they can get. Their main customers seem to be telling them, ‘I'm buying on price.’ Because of that, you get this dealer loyalty issue where you've got the dealer willing to jump because of cheaper product.

“End customers are buying on price, not brand. Manufacturers are having trouble getting past the commodity label. The typical response to this is, ‘I'm going to add more bells and whistles. I'm going to differentiate it.’ Those things customers don't want to pay for right now. I don't see that changing in the near future. I think this something we have to deal with into 2013.”

Optimizing inventory

Consulting services director Dale Billet said inventory control is typically a problem for most companies.

It's important because: material typically accounts for 60% of product costs, so it's by far the biggest portion of the cost of production; it's the largest portion of current assets of most companies; high inventory levels hide other problems; lean considers inventory a waste, feeling that it doesn't make you money — it costs you money; and the cost of inventory is much higher than typically understood.

“The reason it's not understood very well is there's not a line on the bank statement that says, ‘carrying cost of inventory,’” he said.

The costs: interest/opportunity, 10-15%; handling and storage (people and space), 4-8%; damage and shrinkage (scrap and obsolescence), 3-6%; taxes and insurance, 3-6%; redistribution (in the wrong location), 3-6%; transactions (counting, moving, planning, issuing, reconciling), 5-10%; general and administrative staff (managers, planners, physical management), 5-7%. Total: 27-46%.

Billet said 53% reported inventory shortages during 2011.

“Supply-chain risk is increasing,” he said. “If we have a disruption in that chain, it takes longer to recover. It's now a global economy. Most of the people who source outside the US typically source that commodity with one person. They don't have two or three suppliers coming in from outside the US. There is increased commodity price and supply volatility. Increased supply-chain risk can be reduced by increasing inventory — safety stock.”

Do you balance inventory carrying costs against projected price increases to determine purchase quantity? How do you measure purchasing?

He said commodity prices are expected to rise 12% during the year (1% per month). Annual inventory carrying costs are 24% (2% per month).

“The typical procurement strategy with rising prices is to purchase larger quantities to hedge against the increase,” he said. “If the expected price increase — a 1% per month — is less than the cost of carrying inventory — 2% per month — you should be minimizing inventory with purchases of the smallest quantities as possible.”

Billet said 71% of the respondents indicated they were going to increase inventory this year, and 78% of the respondents indicated they purchase one to two or more months' supply if raw material prices are rising.

“Why are companies purchasing larger inventory quantities if it costs more to carry the inventory than the expected price increase?” he asked.

Tax strategies

“We see a lot of different strategies out there,” Koch said. “The reality is, we are going to have to cut costs to deal with budgetary and debt issues. And we're going to have to increase taxes. As painful as that is for me to admit, that is the stark reality. Those same issues are in play on the state level.”

On the federal level, he said there are no changes in the foreseeable future. Tax rates are set to rise at the end of 2012.

On the state level, over 30 states have raised tax rates or modified the tax base. That includes increased audit activity, aggressive nexus positions, and amnesty programs.

“You need to be diligent in your corporate and personal tax planning,” he said. “You have to make it a priority.”

Find the NATM Show Report archive with articles from 2012 to present

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